What do you really cost your bank?

2 min readDec. 28, 2011

Advertiser Disclosure

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

How We Make Money.

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for .

Editorial Integrity

Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.

How We Make Money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.

Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.

Share

A few weeks ago I blogged about a story by American Banker’s Victoria Finkle on how much free checking costs to provide, and how those numbers reflect on the sustainability of free checking at some large banks. The upshot was that while each checking account customer costs banks an average of $349, but the average bank revenue per checking account is $268.

Finkle wrote a follow-up recently responding to readers calling for her to look at marginal cost rather than average cost. Marginal cost is the increase in total cost as a result of a business producing one extra unit. Because banks have to do things like keep the lights on at their branches, pay their executives and comply with federal regulations regardless of how many people choose to keep their checking accounts there, the marginal cost ends up being much lower than the average cost per customer.

From Finkle:

“If all of the ‘unprofitable’ customers were eliminated, very little overhead would be eliminated. So overhead doesn’t belong in the equation,” said one reader of the original story, who identified himself as Jeff P.

According to the estimates I gathered from Moebs and other industry members, overhead accounts for about 20 percent of each account’s average costs. For the hypothetical account costing $350, taking out overhead would bring the cost of the account down to about $280, thereby making a far larger group of customers appear profitable.

“Banks should calculate individual customer profitability on whether or not the customer covers their truly marginal costs,” such as processing and sending customers monthly statements, Jeff P. added. “Overhead belongs in the analysis to calculate branch-level or bank-wide profitability — not individual customer profitability. For a customer what matters is if they contribute something towards overhead.”

First off, this post in general shows the value of having awesome, intelligent people reading your blogs. I’ve been fortunate enough to have a lot of really constructive critiques of my stuff that have led to follow-up posts and produced a lot of value for Bankrate readers, and I want to take a second to thank folks reading this who participate in the comments section in this blog.

Getting back to the topic, I think Jeff P. has a great point here, and looking at marginal cost really gives you an insight into why the big banks decided to back off on debit card fees. The difference between $280 (marginal cost) and $268 (average profit) is a lot smaller than the difference between $350 (average cost) and $268. From the big banks’ perspective, charging a debit card fee that helped closed that gap would be great, but if it meant losing a bunch of checking customers, which would do nothing to reduce their overhead costs and would in effect make them a bigger portion of their average costs, didn’t make much sense.

Instead, the banks have elected to raise fees on less-common transaction, rather than making a big splash with new fees, perhaps because they don’t, in reality, have that far to go to get most of their checking customers profitable. Sure, they’re not going to post earthshaking profits on their checking divisions that way, but since for many banks checking accounts are a gateway product anyway, maybe that’s not too big of a concern for them.

If banks do indeed have a shorter path to customer profitability than we think, that’s good for checking accountholders. Because many of the fees banks are choosing to boost are tied to less-frequent transactions like international transfers and ordering replacement debit cards, customers likely won’t notice them all that much. If that’s enough to make “free checking” a viable product, that will make a lot of consumers pretty happy.

What do you think? How should banks look at customer profitability?

About the author

Claes Bell graduated from Florida State University with degrees in History and Writing, after serving as a staff writer and assistant Arts &amp; Entertainment editor for The FSView and Florida Flambeau. He took a three-year hiatus from journalism to teach intensive reading at two West Palm Beach-area high schools before returning to journalism as a sports desk clerk for The Palm Beach Post, a freelance copy editor for Bankrate, and a freelance writer published on Bankrate and other outlets.
He joined Bankrate full time as a copy editor in 2007. In February 2009, he was promoted to reporter and now writes about banking, CDs, cars and a variety of other personal finance topics for Bankrate. Claes also frequently blogs, tweets, and appears regularly as a guest on various media platforms to speak on personal finance.
During his time at Bankrate, Claes has been part of two teams that won notable journalism awards, including a Sigma Delta Chi award from the Society of Professional Journalists for coverage of the Federal Reserve, and a Best in Business award from the Society of American Business Editors and Writers for coverage of the Dodd-Frank financial reform law. He also helped establish Bankrate's presence on social media platforms such as Facebook and Twitter.